Why are Gilts Making Headline News Today?
As we enter 2025, the media headlines are full of information encouraging investors to take advantage of the current high level of UK interest rates and yields through investment in UK Gilts and Treasury Bills. We had initially identified the increased value of these holdings in 2023 but believed that the economic and political environment might lead to reduced yields in 2024. Since the recent surge in UK Gilts and Treasury Bills, we believe that there is considerable value to this opportunity and we wanted to answer questions that you may have about how and why we are investing on your behalf.
How do we invest?
We are buying short-dated Gilts and/or UK Treasury Bills. Treasury Bills are issued with one, three-, and six-months maturities. The market is liquid and, if necessary, the bills can be sold in the market for next day settlement, otherwise we are repaid when the bill matures. The bid/offer spread (the difference between buying and selling prices) is narrow, in normal market conditions around 0.07%. Dealing prices are net, so no commission is charged. The gain on Treasury Bills is subject to UK income tax. The solution therefore offers quick access to the cash invested in an investment backed by a highly rated creditor, presenting a relatively low risk.
Are there tax advantages to these assets?
During the very low interest rate years the Government issued Gilts with very low interest coupons, in some cases as low as 1/8 percent. Given the low coupon rate, the issues trade at prices in the low to mid-nineties and mature at 100. Gilts are exempt from capital gains tax, and the low income level is beneficial from an income tax viewpoint. The yield comparison with after interest rates on deposits provides an attractive alternative.
What risks are presented by Gilts and Treasury Bills?
The risk element is based upon a failure by the UK Government to honour their promise to pay back the debt or, alternatively, a scenario in which a client needed to sell the bonds into the market prior to maturity and there was no liquidity, or that bid/offer spreads had widened dramatically. In both scenarios, some value could be lost. However, we would rate the possibility of a loss of liquidity as very low and the idea of a default by the UK Government, even after events in 2022, seems almost beyond comprehension. It is important though, that you understand any form of investment carries risk and although we would categorise the investment risk here as very low, it does exist.
This article was prepared by Mike Fitzhugh, one of our Investment Managers. We always appreciate your feedback. If you have enjoyed this article or have any specific topics you would like to see addressed in future newsletters, please email us.